DISTINCTION BETWEEN INDEMNITY AND GUARANTEE, RIGHTS AND DUTIES OF INDEMNIFIER AND INDEMNIFIED

This article is written by Ganji Sneha of BALLB of 7^th Semester of Sri Padmavati Mahila University, Tirupati

ABSTRACT

In today’s world, everything is becoming digitalized to keep up with the demands of our fast- faced society. The computer technology raised quickly and rapid emergency of industrialization, globalization and complexities. The traditional pen and paper contracts have evolved now in the form of new age of E-contracts( electronic contracts), we are using contracts from the morning to evening. We enter into a number of transactions during the day to day of our life, and these transactions directly or indirectly, expressly or implied, knowingly or unknowingly it result in contracts. We all understand that, contracts have become so common in our daily life’s  that most of the time we do not even recognize that we have entered into a contract. For instance, buying a product from the market or for food-we enter into a contract with seller of the food, or having a taxi, buying airline tickets online, similarly for all our needs like health, education, etc. countless things in our daily lives are ruled by contracts, which ultimately result into a contract. So, we all must know about the contracts. According to Section 2(h) of the Indian Contract Act, 1872 A contract is an agreement which is enforceable by law. The parties who enter into a contract, they must have competency to enter into a contract. Minor’s, persons of unsound mind, and persons disqualified from law to which they are the subject to, they are not competent to enter into a contract.

This Comprehensive Article explores the legal differences between the indemnity and guarantee. It look at each concept’s like definitions, elements, purpose, and their rights and responsibilities as they relate to the Indian Contract Act, 1872 and also covers parties who are involved in contract of indemnity and guarantee. The number of contracts formed and their liability arising out of contract. Whether you are a business owner, legal enthusiastic or simply someone looking to expand your knowledge of legal landscape to the exploration of a contract of indemnity and know the importance of legal safeguards.

KEYWORDS

Indemnity, Guarantee, Contract law, E-contracts, Minor, liability, principal debtor, principal creditor, surety, Contractual capacity, Industrialization, Globalization.

INTRODUCTION

The contract of Indemnity and Guarantee are the special contracts under the Indian Contract Act. In the complex field of contract law, two closely related but quite different legal concepts- the indemnity and the guarantee. These terms are frequently interchangeable of terminology it causes misunderstandings and confusion arising among legal practitioners and law students . However, everyone need to know the difference between the indemnity and guarantee for drafting, interpretation, and successful contract construction.

The both contract of indemnity and guarantee are very similar in concepts, but there are significant implications regarding their rights, responsibilities, and liability of third party’s in case of any default arising in a contract, and the remedies available to the parties under Indian Contract Act 1872. Both the Contract of Indemnity and Guarantee perform similar functions is that providing the “ compensation to the creditor for the failure of a third party to perform their contractual obligations”.

The Contract of Indemnity means it is a legal agreement and where one party promises to compensate the other party if any loss or damage occurred. The Contract of Guarantee is a promise made by one party to be responsible for the debt or for the default of another person.

In the Indian legal system chapter VIII, section 124-147 of the Indian Contract Act, 1872 lays  down the provisions relating to the contract of Indemnity and Guarantee. According to Section 124[1] of the  Indian Contract Act, 1872 defines, Contract of Indemnity means “ A contract by which one party promises to save the other party from the loss caused to him by the conduct of the promise himself or by the conduct of any other person”. On the other hand, as per Section 126 of the Indian Contract Act, 1872 defines a Contract of Guarantee as “ A contract to perform the promise, or discharge the liability, of a 3^rd party in case of his default”.

Now, we have to know about the contract of Indemnity and Guarantee. In the field of contract law the concept of indemnity and guarantee plays a vital role in establishing the respective rights, obligations and liabilities of the parties in the contract.

UNDERSTANDING THE CONCEPT OF INDEMNITY

Meaning of Indemnity

The word “ Indemnity” is derived from the Latin word “ indemis”, which means “ injured” or “ no damage or any loss occurred”. In a legal context Indemnity refers “ one party(the indemnifier) promises to save the other party( the indemnified) from any loss or damage occurred”.

The essence of a contract of Indemnity and Guarantee, is protection against any loss or damage, especially in the form of a promise to pay, or payment for loss of money, goods, etc. It is a security against or compensation for loss.( The indemnifier takes the responsibility to pay for the damages occurred by the indemnified party).

Definition of Indemnity

According to Section 124 of the Indian Contract Act, 1872 Contract of Indemnity- “ A contract by which one party promises to save the other party from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person”.

According to this definition, there are three essential elements of the contact of indemnity:

1. There must be a loss.
2. The indemnifier promises to save the indemnified party from the loss occurred( The indemnifier is only liable for the loss).
3. The loss must be caused either by the indemnifier(the promisor) or by any other person.

Thus, it is clear that this contract is contingent( may or may not happen) in nature and it’s enforceable only when the loss occurs.

Parties Involved in Contract of Indemnity

There are two parties involved in the contract of Indemnity:

1. The Indemnifier: The person who promises to make good the loss is called the “ Indemnifier” also known as “ promisor”.
2. The Indemnified: The person whose loss is to be made is called “ Indemnified” or “ Indemnity holder” also known as “ promises”.

The indemnifier is legally responsible to make good the loss or damage occurred by the indemnified person, provided that loss falls within the Indemnity agreement.

Main objective of Contract of Indemnity

The main objective of the contract of indemnity is “ to protect the promisee from the loss or damage upon the happening of a contingency( uncertain event)”.

Essential Features of Contract of Indemnity

If the contract of Indemnity to be enforceable and valid under Indian Contract Act, 1872 following essentials must be fulfilled:

1. Valid Contract: An indemnity contract must possess all essential elements of a valid contract under the Indian Contract Act 1872 those are, offer and acceptance, Legal relationship, competency to contract, lawful object, legal formalities.
2. The parties: As earlier mentioned, a contract of indemnity there must be two parties i.e., The indemnifier and the indemnified.
3. Loss protection: The main objective of Contract of Indemnity is to protect the promisee from a loss. The promisor is obligated to recover the loss incurred by the promisee.
4. Single Contract: In a contract of indemnity there is only one contract between indemnifier and the indemnified party. Whether in contract of guarantee there are several contracts are involved.
5. Indemnity Contract may be Express or Implied:

Express indemnity contract: A contract of indemnity is said to be  express, when a person promises expressly to compensate the other party from the loss.

Implied  indemnity contract: A contract of indemnity is said to be implied, when it is to be inferred from the conduct of the parties or from the circumstances of the case.

• Insurance Contracts of Indemnity: All most all insurances other than life and personal accident insurance are contracts if indemnity. Insurance Contracts are not contracts, because insurance contracts what happen is when insurance taken by the promisor or promisee. Some amount they paying and taken some amount as consideration, so here consideration is not there in Indemnity contracts.

Types of Indemnity Contract

In the Indemnity Contract, they are classified into two categories:

1. Express Indemnity:

• Express Indemnity also known as written indemnity. Under express Indemnity all the terms and conditions of the indemnity are necessary mentioned in the contract.
• The rights and liabilities of both parties are clearly stated in the agreement.
• Some examples of express Indemnity is insurance contracts, agency contracts.

2. Implied Indemnity:

• In implied Indemnity arises from the facts and the conduct of parties involved without written text in the contract.
• The core example of implied Indemnity is the “ master- servant” relationship where the master is liable to indemnify the servant if any loss or damage occurred while he was working as per master instructions.

THE RIGHTS AND DUTIES OF INDEMNIFIER AND INDEMNIFIED

RIGHTS OF THE INDEMNIFIER

The Indian Contract Act is silent regarding the rights of the indemnifier in a contract of indemnity. It may be said, according to the English law the rights of the indemnifier are similar to the rights of a surety under Section 141 of the Indian Contract Act, 1872. Some of rights of Indemnifier are:

1. Right to use the third party: The indemnifier has indemnified the indemnity- holder against the loss or damages and amount of property occurred by the third party, he is entitled to have full rights over the property and he has the right to Sue the third party for that property too. Indemnifier pay the damages to the indemnity holder, then only he has the right to sue the third party over the property.
2. Compensate losses which are covered indeed: In the contract of Indemnity, the indemnifier has a right to pay only for loss or damages which are incurred in the contract of Indemnity.
3. Right under Doctrine of Subrogation: According to surety’s subrogation rights, after settling the claims of the creditor the surety steps into shoes of the creditor and such cases, entitled to receive whole amount from the debtor. So indemnifier also has right to recover the money or possession.

DUTIES OF THE INDEMNIFIER

The duties of indemnifier( promisor) are not particularly defined under the Indian Contract Act, 1872 but the duties of indemnifier is similar to the rights of the Indemnity holder under Section 125 of the Indian Contract Act. Thus, some of the duties of indemnifier are stated below:

1. The main duty of the indemnifier is adhered to the rules, terms and conditions of the contract of indemnity.
2. The indemnifier must behave in good faith with due care and responsibility.
3. The indemnifier must perform his duty of the contract needed.
4. The duty of the indemnifier is to pay to the indemnity holder for all damages.
5. It is the duty of the indemnifier to pay all costs occurred by the indemnity holder, due to the breach of contract by the indemnifier. So it is the duty of indemnifier to compensate for his losses.

RIGHTS OF INDEMNIFIED PARTY OR INDEMNITY HOLDER

Section 125[2] of the Indian Contract Act deals with the Rights of the Indemnity holder. The indemnity holder in a contract of indemnity acting within the scope of his authority, is entitled to recover from the Indemnifier( promisor):

1. Right to recover all the damages: All the damages which the indemnified party may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies. In simple words, to recover all damages of the subject- matter.
2. Right to recover all costs: All costs which the indemnified party may be compelled to pay in bringing or defending such suits. But the indemnified should have acted as any prudent man would act under similar circumstances in his own case, or with the authority of the indemnifier.
3. Right to recover sums paid under compromise: To recover all sums paid by indemnified party for compromise of any such suit, if the compromise is within the purview of the contract of indemnity.

Case law: Gajanan Moreswar v. Moreswar Madan(1942)[3] In this case, Gajanan Moreswar( The plaintiff) was a lease holder of a plot of land under the Bombay Municipality for a long time. He transferred the lease to the Moreswar Madan( The defendant) and the same was approved by the Bombay Municipality. But no execution effect was made in favour of the defendant. So, the lease continued in the name of the plaintiff. The defendant borrowed RS. 5000/- from ‘A’. The lease hold interest was given as security to ‘ A’. The plaintiff at the defendant’s request, executed the mortgage. The defendant agreed to pay the interest and release the mortgage, but the defendant did not pay and release the mortgage deed. Then the plaintiff sued the defendant for indemnity. Therefore, the Bombay High court held that, Indemnity holder( plaintiff) liability has absolute. So the indemnifier( Defendant) to pay off.

DUTIES OF THE INDEMNIFIED PARTY OR INDEMNITY HOLDER

1. The basic duty of the indemnity holder is must adhere to the terms and conditions mentioned in the contract of indemnity. If there is any contravention in terms and conditions in the contract by the indemnity holder then, the indemnifier cannot be liable to indemnify.
2. Indemnity holder main duty is to act prudently.
3. It is the duty of the Indemnity holder to act in good faith. He must act with a bonafide intention if any malice intention would be considered a contravention. If the indemnity holder tries to make the indemnifier to pay for his self losses, then the indemnifier will not be liable for loss made by the indemnity holder.
4. The core duty of the indemnity holder is not causing any damage or loss.
5. The duty of the indemnity holder is strictly following the instructions given by the indemnifier.

UNDERSTANDING THE CONCEPT OF GUARANTEE

Meaning of Guarantee

The term “ Guarantee” means “ assurance given by one person( surety) to another at the default of some other person( principal debtor)”. It is also known as contract of Suretyship.

Definition of Guarantee

Section 126[4] of the Indian Contract Act, 1872 defines the contract Guarantee as “ A contract of Guarantee is a contract to perform the promise or discharge the liability of a third party in case of his default”.

The main object of a contract of guarantee is “ to provide additional security to the creditor in the form of a promise by the surety to fulfill a certain obligation in case of the principal debtor fails to do that”.

Example 1:  A and his friend B enter into a shop and A says to C “ supply the goods required by B and if he does not pay to you, I will pay”, This is a contract of guarantee. Here there are three parties involved in this contract.

Example 2: X takes a loan from a bank. X promises to the bank to repay the loan. Y also makes a promise to the bank saying that, if X does not repay then the loan I will pay. This is a contract of Guarantee. Here there are three parties in this contract. X is the principal debtor( whose taking the loan from the bank), Y is the Surety( whose promises to discharge X liability in case of any default arising), The bank is the Creditor( whose giving the loan).

Parties Involved in Contract of Guarantee

In a contract of guarantee involves three parties:

1. The principal Debtor: The person in respect of whose default the guarantee is given.
2. The principal Creditor: The person to whom the guarantee is given.
3. The Surety: The person who gives guarantee on behalf of principal debtor.

Essential Features of a Contract of Guarantee

The Essential features of a valid contract of guarantee are stated below:

1. It may either oral or written: A contract of guarantee may be either oral or written under Section 126 of the Indian Contract Act. It may be Express or Implied. Implied guarantee contract, may be inferred from the course of conduct of the parties concerned. But, in England a contract of guarantee must be in writing and signed by the person to be enforceable.
2. Primary liability in some person: There must be a primary liability in some person other than surety. If the liability does not exist there cannot be a contract of guarantee. But a guarantee given for the debt of a minor is an exception to this rule.
3. Tripartite Nature: The contract of guarantee is no doubt it is tripartite in nature. It involves three parties( The principal debtor, principal creditor, surety) in this contract of Guarantee, form of three distinct contracts:
4. Between the principal debtor and the creditor, where the debtor promises to pay.
5. Between the surety and creditor, where the surety promises to pay on behalf of principal debtor, if he fails to pay.
6. Contract between the principal debtor and Surety, where the debtor promises to indemnify the surety, payments made under the Guarantee.
7. Surety promises to pay upon any default: The surety promises to pay to the creditor if any default made by the principal debtor.
8. Essentials of a valid contract:  A contract of Guarantee must have all the essential elements of a valid contract. But, the following two important points should be noted.
9. All the persons must be capable of entering into a valid contract, though the  debtor may be suffering from incapacity to enter into contract. In such a case the surety is regarded as the principal debtor and is liable to pay personally even though the principal debtor(i.e., a minor) is not liable to pay.
10. Consideration received by the principal debtor is sufficient for the surety and it is not necessary that it must necessarily result in some benefit to the surety himself. It is sufficient if something is done or some promise is made for the benefit of the principal debtor.

Example: A requests B to sell and deliver to him goods on credit, B agrees to do so, provided C will guarantee to pay the price of the goods. C promises to guarantee, the payment in consideration of B’s promise to deliver the goods. This was a reasonable consideration for C’s promise.

EXTENT OF SURETY’S LIABILITY

Surety’s Liability: According to Section 128[5] of the Indian Contract Act deals with the Nature and extent of surety’s liability. Section 128 states that, “ the liability of the surety is co- extensive with that of the principal debtor unless or otherwise provided by the contract”.

This means the surety’s liability is the same as that of the principal debtor and the creditor can directly sue the surety without first having to sue the debtor. The surety is liable to make the payment immediately upon the default of the debtor.

Therefore, it is important to note that the primary responsibility for making the payment lies with the debtor and the surety’s liability is secondary in nature. If the debtor cannot be liable due to a defect in the underlying contract, the surety may also be absolved from their liability.

RIGHTS OF THE SURETY

Rights of the surety may be classified as under the following:

1. Rights against the principal debtor.
2. Rights against the creditor.
3. Rights against co-sureties.

Rights against the principal Debtor

A surety has the following two rights against the principal debtor:

1. Right to be relieved of liability: Before the payment has been made the surety can cancel the principal debtor to relieve him from liability by paying off the debt. But before he can do so the debt must be ascertained. Once, the debtors liability occurred as fixed sum, the surety can ask him to exonerate him from the liability.
2. Right to Indemnity: In every contract of guarantee, there is an implied promise by the debtor to Indemnify the surety and the surety is entitled to recover from the debtor. whatever the amount he has rightfully paid under the guarantee, but not those sums which he had paid wrongfully.

Rights against the Creditor

1. Right to securities: A surety is entitled to the benefit of every security, which the principal creditor has against the principal debtor at the time, when the contract of Suretyship. Whether the surety know the existence of such security or not and if the creditor loses or without the consent of the security, with such security the surety is discharged to the extent of the value of security.
2. Right to claim set off: On being, sued by the creditor the surety can rely on any set-off or counter claim. Which the debtor has against the creditor.

Rights against Co- Sureties:

Meaning of co-sureties: When the same debt or duty is guaranteed by two or more persons, such persons are called co- sureties.

1. Right to claim contribution: If the sureties, have made commitments for equal amounts they can demand contribution from each other when the principal debtor defaults.
2. Right to claim a share in securities: If a co- surety obtains any security of principal debtor the other co- surety( or co- sureties) has( or have) a right to share such security.

DISTINCTION BETWEEN THE INDEMNITY AND GUARANTEE

While indemnity and guarantee share common purpose of, providing compensation to a creditor when a third party fails to perform their obligations, there are several crucial distinctions between these two legal concepts. Understanding these differences is essential for legal professionals when drafting, interpreting, and enforcing contracts.

Differences basis	Contract of Indemnity	Contract of Guarantee
Parties Involved	There are two parties: Indemnifier, Indemnified.	There are three parties: Principal debtor, Principal creditor, Surety.
Number of contracts	There is only one contract between indemnifier and indemnified.	There are three contracts: Between surety and creditor, Between debtor and Surety, Between creditor and debtor.
Liability	The liability of indemnifier arises on the happening of a contingency.	The liability of surety arises, if there is a default by principal debtor.
Object of the contract	The object of the contract is to reimburse the loss.	The object is to provide security to the creditor.
Third party can sue	Stranger to contract cannot sue. Indemnifier must always bring the suit in the name of indemnified and cannot sue third parties in his own name.	Stranger to contract can sue. If the surety discharges the debt payable by the principal debtor he steps into the shoes of creditor and becomes entitled to realise the money paid in his own name.
Oral or written	Can be either oral or written	May be either oral or written, but under English law, must be in writing will  be enforceable.

CONCLUSION

The contract of indemnity and contract of guarantee both are very similar, in that both provide protection against loss or damages occurred. However, earlier mentioned that there is an important distinction between the two. Whether, a contract is a contract of indemnity or guarantee is a question of construction in each case. In a contract of indemnity the indemnifier takes the primary duty to compensate the indemnified party for any loss or liability regardless of the indemnified party’s fault. The indemnifier liability is not contingent on default of third party. On the other hand, a contract of guarantee involves three parties, with the surety’s liability being secondary and arising only upon the default of the debtor. Therefore, the difference between indemnity and guarantee is the fundamental concept in contract law that requires Lawful consideration and analysis to ensure the drafting, interpretation, and enforcement of these crucial legal agreements.

REFERENCES

1. Drishtijudiciary, https://www.drishtijudiciary.com/to-the-point/ttp-indian-contract-act/contracts-of-indemnity-and-guarantee  Visited on 14/04/2024.
2. Blogipleders,https://blog.ipleaders.in/difference-between-contract-indemnity-contract-guarantee/  Visited on 14/04/2024.
3. Lawbhoomi,https://lawbhoomi.com/rights-of-indemnifier-in-india/#:~:text=The%20indemnifier%20has%20the%20right,for%20such%20losses%20or%20damages.h  Visited on 15/04/2024.
4. Law foyer, https://Lawfoyer.in/rights-and-duties-of-indemnifier/  Visited on 15/04/2024.

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[1] Indian Contract Act 1872, § 124, No. 9, Acts of Parliament, 1872 ( India)

[2] Indian Contract Act 1872, § 125, No. 9, Acts of Parliament, 1872(India)

[3]  Gajanan Moreswar v. Moreswar Madan, AIR 1942.

[4] Indian Contract Act 1872, § 126, No. 9, Acts of Parliament, 1872( India)

[5] Indian Contract Act 1872, § 128, No. 9, Acts of Parliament, 1872( India)

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